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Profit Like a Landlord Without the Headaches

Written by: Marc Courtenay01/09/13 - 6:30 AM EST

Tickers in this article:
ADC LXP SIR

NEW YORK ( TheStreet) -- Once upon a time, I owned an apartment building with 15 residential rental units. I hired a property manager to deal with the residents and keep an eye on the upkeep of the building and grounds. She charged me 7% of the gross total rent.

What I didn't understand was that some property managers make money by doing the maintenance and repairs themselves (through their employees) and billing it as a way of making a profit.

For instance, one of the apartment air conditioners stopped working. The property manager called and asked me if her crew could fix it. I asked, "How much will it cost me?" She said, "I'll let you know."

A few days later she called and said it could be replaced for $300 and repaired for $200. I said, "Repair it." Two weeks later I did my own belated investigating and discovered I could have repaired it myself for $100.

When I wasn't negotiating with the property manager (I fired the first one and hired another) I was constantly concerned with filling vacancies and dealing with the usual renter problems. My net annual rate of return (cap rate) never exceeded 8%, and I had to tie up a lot of my investment capital in the ownership of the apartment complex.

Thankfully, I was contacted by an international investment group that wanted to buy my building, for a small profit. It was a good learning experience and it helped me to remember there are smarter ways to derive income from residential or commercial properties without the headaches of ownership.

"When you can buy the best properties in the world and collect large amounts of rental income, it's probably the safest and most lucrative investment you could ever make.

"The risks are low... your money is invested in something real and tangible (the valuable property)... and the rental income and capital gains can make you wealthy, especially if you buy at the right price."

That has been my experience as well, IF, you buy the shares of an experienced real estate company at a reasonable price per share.

So I began accumulating shares of undervalued, well-managed real estate investment trusts that offered at least a 5% dividend from the company's funds from operations, or FFO.

One that I bought in November at $9.51 a share is Lexington Realty Trust (LXP) . As of January 8, 2013 LXP closed at $10.76-a-share.

With its 60 cents annual dividend the current yield to price is close to 5.6%. When I purchased at $9.51 the yield to price was 6.3%, and because I waited for the price I wanted my shares are now up 13%. I'm not bragging, just pointing out how well this process can work for the prudent, patient investor.